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Retirement planning is usually not a priority many young couples.
As you're both becoming established in your careers you have several monthly bills that you have to tend to. They usually include:
- Monthly bills (utilities, insurance, etc.)
- Car payments
- Student loans
For some couples, there isn't any money left once they've taken care of their other obligations. Retirement is so far away in your timeline, it’s tempting to put it off for a bit or keep your contributions to a minimum (if at all).
I want you to know that it is possible to get started with investing, even if you don't have a huge amount.
I've included a small guide on how you can set up an IRA and maintain your contributions. Hopefully, you can use it as a jumping point and build from it.
Deciding What to Include when Investing for Retirement
You have to adjust and tailor your portfolio to fit your needs. If you're looking at a guideline to follow, I based my asset allocation on David Swendsen's model.
Swendsen has had a long track record of solid returns at Yale. He released a book for regular investors called Unconventional Success: A Fundamental Approach to Personal Investment, and he shared his ideas on how average people can improve their returns.
I think they're a good starting place for creating your portfolio. Schultheis lays out his investing philosophy based on 3 things:
- Save for a rainy day. (Develop a long term financial plan)
- Don’t put all your eggs in one basket. (Diversify in different asset classes.)
- There is no such thing as a free lunch. (Capture the entire return of each basket, or asset class, through low cost index funds).
He offers the following recommendations:
- Domestic Equity (30 percent)
- Emerging Market Equity (5 percent)
- Foreign Developed Equity (15 percent)
- Real Estate Investment Trusts (20 percent)
- U.S. Treasury Notes and Bonds (15 percent)
- U.S. Treasury Inflation-Protection Securities, or TIPS (15 percent)
You don't have to follow this model, you can start with one or two and slowly add more to suit your specific long term goals.
Finding Index Funds to Start Off With
Some index funds require that you have a minimum. Even if you are limited on your budget, there are ways you can go ahead and invest.
I went ahead and searched for some index funds for you to start off with. Here are 5 index funds that have a minimum requirement of $250 or less to open:
- Schwab S&P 500 Index Fund (SWPPX) – $100 minimum
- Schwab Total Stock Market Index Fund (SWTSX) – $100 minimum
- Schwab 1000 Index Fund®(SNXFX)
- Schwab Small-Cap Index Fund®(SWSSX)
- Schwab International Index Fund®(SWISX)
Here are 5 index funds that have a minimum requirement of $1,000 or less to open:
- Homestead Stock Index (HSTIX) – $500 minimum
- Vanguard STAR Fund (VGSTX) – $1,000 minimum
- T. Rowe Price International Equity Index Fund (PIEQX) – $1,000 minimum
- T. Rowe Price Equity Index 500 Fund (PREIX) – $1,000 minimum
- T. Rowe Price Spectrum Growth (PRSGX)
This isn't a comprehensive list, but it's enough to get your started. You just have to look over and see if it's right for you.
Betterment: Easy Investing
If you believe in passive investing and you’re an investor looking for a simple, no hassle option, then I think Betterment could be a good for for you.
One concern for new and would be investors is how risky it seems. They see the news and wonder if putting their money into the stock market is the right move for them. How can tell when they should buy low and sell high? What metrics can they use to find out how to time the market?
There are definitely people who find it easier and more successful to work with index funds. Schultheis, author of The New Coffeehouse Investor, provides plenty of data on the historical returns of the stock market from 1926-2008. He persuasively argues that by comparing different investment vehicles, long term investing is not as risky as some imagine.
If you’re interested, you can sign up for a new account at Betterment here.
Target Funds – Keeping It Simple for Your Retirement Portfolio
What if you don't want to buy several funds? You may want something quick and easy that will take care of asset allocation automatically.
Target date funds can give you all of that. Most target date funds are listed by estimated date of retirement with 5 year increments.
Based on Vanguard's guide, here are some target funds dates to examine based on age:
- Age 18-22 : 2055
- Age 23-27: 2050
- Age 28-32: 2045
- Age 33-37: 2040
- Age 38-42: 2035
- Age 43-47: 2030
- Age 48-52: 2025
- Age 53-57: 2020
- Age 58-62: 2015
As you get closer to retirement, the fund should adjust and become more conservative.
Even though you've invested your money into a target-date fund, that doesn't mean you just forget about it. Check to make sure the fund is meeting expectations and is adjust the portfolio accordingly.
The easiest way to stay on target for your investment goals is to go ahead and automate your IRA contributions. It has certainly helped me avoid skipping deposits.
The advantage of starting early is the benefit of compound interest. The two most important factors for obtaining the benefit of compound interest are the interest rate and the length of time your money earns interest.
The latter is the most important; your investment will grow slowly at first, but over the long term you will see dramatic improvements.
My advice is to at least have an emergency fund in place and pay off any debt that's higher than 12% before you start investing into your IRA.
Sometimes our mental accounting makes us believe that if we have some money invested it'll offset the debt we have.
It's better to have money available for immediate access and to not have debt collectors harassing you over credit card bills.
Where to Invest?
If you're looking for companies to invest in, here are a few suggestions:
You may also want to check with your local bank or credit union to compare fees and expenses.
While you are limited on what you can contribute now, you should plan ahead for when you can increase your deposits. Hopefully, you'll be able to start maxing out your IRA each year. Currently, annual contribution limits to Roth and Traditional IRAs are $6,000.
Don't forget that these are for individuals, so a couple can contribute $12,000 into IRAs (between them). If you break that down, that would be about $415/month for a person or $830/month for couples.
It can definitely seem like a huge amount, but if you simply increase your contribution every time you get a raise, you'll be surprised at how quickly you can do it.
Jump-starting Your Retirement Investing
I'd like to hear your take on investing and where to begin. How have you started with your investing? What was the most difficult step in setting it up? Was it easier or harder than you expected?
If you're getting a bonus this year or you'll be getting a tax refund next year, have you considered using some or all of it to get started?